CREDIT SUISSE GLOBAL EQUITY STRATEGY

Regional allocation. We highlighted two weeks ago that we recommend a benchmark of GEM equities (see What to do with emerging markets, 11 September). In this review of the other regions, we make the following changes:■ Japan: reduce the size of our overweight, owing to GEM economic exposure and Abe`s loss of popularity, but we stay overweight because Japan scores very well on our quant scorecard, is likely to have the most immediate policy response (we expect QQE to accelerate by ¥15trn in late October), the best earnings revisions (driven by underlying change, not just yen weakness), the best funds flow story (domestic investors, public and private, could buy c.11% of market cap), clear signs of corporate change (that may have been underestimated) and it is the cheapest region on EV/EBITDA. The problem is Japan`s very high operational leverage, but if anything, we believe investors are now too pessimistic on global growth.■ Continental Europe: reduce the size of our overweight as 18% of sales come from GEM, it has the fewest signs of investor capitulation relative to other regions, and we fear that consensus is too bearish on the euro. However, we still believe investors should be overweight euro area equities as: (i) European equities are discounting just c.0.5% GDP growth and a sharp fall in macro surprises (with September`s flash PMIs showingresilience) – we believe there is a genuine domestic demand story; (ii) to return to an average valuation on normalised earnings against the US, euro area equities have 10% upside potential; (iii) the very large output gap means that, after Japan, there is the greatest scope for policy proactivity. We reduce German equities to benchmark (having reduced most of our overweight in March and having taken German autos to underweight in July). We stay underweight France but increase Spain to overweight and continue to like Italy.■ UK: remain benchmark: UK equities score second bottom on our quant scorecard, with valuations ex resources extended. UK equities correlate closely with GEM equities, where we are now benchmark. We take domestic cyclicals to underweight as UK growth is slowing, but wages are accelerating. We take the non-food retail sector to underweight.■ US: reduce the size of our underweight: The US has the lowest corporate sales and economic exposure to GEM, (relatively) improving earnings revisions and sentiment is depressed. The problem is that if global growth accelerates or US rates rise, then the US underperforms and relative valuations (on P/B, Credit Suisse HOLT® and P/E) are now at the top end of their range.